Sunday, April 12, 2009

A Primer on the Coming Global Currency

Having spent the last century teaching the rest of the world how to function in a civilized, productive economic order, and having enriched much of it by outsourcing container-loads of our productivity and going into massive hock [not hawk], is the US now about to be, in a moment of mortal weakness, relieved of its role as benefactor of the world?

The G20 has agreed to capitalize the IMF with $250 billion in SDR’s -- “special drawing rights” – a composite currency, prototyped by the Euro.

Details are by no means in abundance on this. If few things are more opaque and mysterious than derivatives, the IMF is one of them. Understood, if at all, only by initiates, one secret world is being invoked to remedy the faults of another. The media, as we will see, are spinning the story in real time. What hope is there of grasping this for us mere mortals? The best we can do is make educated guesses. To wit:

Think of the IMF (or some surrogate entity), in this capacity, as acting on behalf of the world as the Federal Reserve acts on behalf of the United States. And, please, by all means, don’t stop there: exercise your imagination and contemplate the implications for national sovereignty once a supranational body controls the purse strings. If you’d like an analogous situation to help you picture it, think of Citi, GM, and AIG on the dole and under federal control. The media jokes about the “Autocrat” in the White House, put in the driver’s seat, as it were, by federal bailouts to these businesses. Do you like having Obama running GM? You’ll love having some Eurocrat running your healthcare system, then.

Alarmist? What you will have, dear reader, is the lifeblood of a market economy -- credit -- being controlled by an entity that isn't subject to your constitution and, in fact, probably has been nursing a grudge about it for generations. Undoubtedly the US will have representation in such an entity. But representation isn't control. Perhaps it's right to be alarmist.

Think of a committee of foreigners deciding how much of the US debt gets refinanced by SDR’s, were the market to trash the dollar. How might that go? Probably about as well as any other smoky back room power-play, only instead of good old boys deciding the terms, a bunch of self-righteous UN types does it. National salary caps? International “rich” tax? Reparations for historical “wrongs?” Social engineering covenants? If that doesn’t scare you, then think about moral hazard writ global: everything for which Alan Greenspan has been excoriated on national television by the morons in congress, brought to you instead by a mealy-mouthed panzy from Brussels. To whom will the world turn for a bailout then? If aliens don’t exist, they will have to invent them, along with an intergalactic currency with an intergalactic central bank to refinance the debt. It is, after all, all about confidence. Which might be another way of saying, it’s a con.

But things can’t happen all at once. The media, during the G20 meetings, dutifully passed along its emissions, and dutifully back-pedaled and qualified its reporting once the reaction to said emissions was expressed in markets. First, from Russia, the call for a global currency. Then, as if on cue, a paper from the governor of China’s central bank, supporting the idea. Not long after this, Tim Geithner’s historical, drooling endorsements on the creation of SDR’s: “we’d love to see that.” Indeed.

By the time Giethner opened his mouth, the markets were getting the drift of the G20’s Big Idea. That single utterance was the straw that broke the camel’s back: it had such an immediate and destructive effect on the price of the dollar in foreign exchange markets (it dropped over 1% within moments) that he was forced immediately to recant. As things are currently being spun by the Financial Times, everyone misunderstood all this SDR talk; the G20 resolutions are “unlikely to threaten the dollar,” and nobody meant what we told you they said a couple weeks ago, especially Timothy Geithner.

We propose the following translation: “If the dollar crashes, the whole world goes to smash, so forget all that SDR stuff.” Meantime, of course, the IMF is capitalizing SDR’s, and we’re betting on seeing a drip of international debt financings denominated in them, just as if the SDR were a regular currency, and the IMF was its Central Bank.

Just a drip, at first, until the public mind has been made to forget the G20 comments; lest the natives get too restless. But the drip will turn into a stream, etc., as the world decides its has outgrown its need for the United States to be its big brother now that its heretofore bottomless, benevolent pockets have finally come up empty. It is painfully clear that the United States is bankrupt, and that future generations must be taxed to repay our massive outstanding debts.

This, naturally, concerns our debtors. The SDR is a clever shot at a fix: create a new, fiat currency and use it to support an economy as the dollar once did. The cost, of course, is the United States’ position of economic leadership in the world. Oh, we’ll still be the workhorse. We just won’t own all the stock. In this round of poker, we’ve folded, but the house may extend us some margin in order to make whole our competitors. Instead of the US working its way out as it always has, it’s being subsumed into a socialistic international financial order that will hinder its ability to be productive and will likely worsen our debt picture. Think of the tail wagging the dog. It’s a very sophisticated form of slavery, debt is.

Now that the world understands central banking, and a singular moment has come, it’s stepping up to seize it; now, while there are still international markets that function because of the status of the dollar as reserve currency -- now is the time to piggyback upon it and launch its international supplanter. “Global solutions are needed,” they say. “A new world order,” they cry. Even the president of the US thinks his country has seen its better days, and won’t shut up about “European leadership in the world.” About the only thing that can delay or interrupt this development is a disruption on par with a world war. Or, however unlikely, the holy wrath of the American people who, the last time we checked, were actually responsible for the decisions their government makes.

China and Russia are two elephants on the world stage that seem to be good and ready to hedge their reliance upon the dollar. From a purely academic viewpoint (which, unfortunately, is the viewpoint of many policymakers) hedging anything makes sense. It makes sense to hedge your portfolio if you’re investing. It’s not likely that selling a bit of one stock to buy another is going to cripple the future of that company. But a worldwide rejection of the US dollar will decimate US national sovereignty. And this is in the offing, just as the administration has announced historic cuts in its military budget.

You might as well put away your flaky novels, dear reader, ‘cause you’re living in the flakiest novel of them all: post-modern reality. Contrary to press releases claiming otherwise, this is the official launch of a global currency that will very likely supplant the US dollar as the world’s reserve currency. You may not (or may) ever buy a cup of coffee with an “SDR,” but no matter – it’ll be at work behind the scenes, behind the dollar in your pocket.